VDL -- My Background
Back in December 2019, I posted that I was going to launch the paid version of my newsletter.
But I never really dove into my personal background and how things came to be…
Consider this a (very) abbreviated memoir of sorts…
From the beginning
I started my career in Big 4 accounting as an auditor working on audits of small private and large public companies based in the Midwest. Incredibly solid foundation for starting a career and understanding/analyzing GAAP financials…
…But I wanted more…
Audit is terrible in the sense that it’s entirely backward-looking. Are the figures accurate? What happened and why? There is no “what comes next?”
This led me to the CFA program and the investment industry.
I found a job as an equity analyst at a boutique, long-only investment manager in the Midwest with ~$500m in AUM. It was a small team of 4 analysts and a PM. It was a very collegial work environment with total autonomy to find and research stocks. I learned a ton from this group and they introduced me to many of the readings and fund managers that shaped my investment philosophy today.
This was also the time period where I was introduced to the world of private businesses and the idea of buying a company at 3x earnings (which is still only partially true).
During my stint as an equity analyst I was able to hone my process and philosophy. As we invested mainly in larger / liquid stocks, it left me free to personally own small and micro cap companies. This was where I spent most of my time digging.
This period was still fairly early in my career which meant I had a smaller net worth to play with meaning concentration wasn’t as big of a deal. I kept reading about successful investors and the early Buffett days of massive concentration in a small number of stocks. I figured I could handle this given I was in my mid-20’s and would have plenty of earnings left to recover (if needed).
Granted I was pretty lucky in developing my process during the post-financial-crisis era with many years of good overall market returns — it still taught me about the idiosyncrasies of these small and obscure stocks that just did not move inline with the overall market. There were some years my portfolio was +70% and another down 4% while the S&P just kept on trucking…
I gravitated toward the early Buffett letters, Greenblatt’s You Can be a Stock Market Genius, Klarman’s Margin of Safety… Some other books that influenced my early years — One Up on Wall Street by Lynch, Contrarian Investment Strategies by Dave Dreman, and anything by Robert Hagstrom — I was a value investor looking for plain vanilla cheap stocks!
Just about every year since 2013 (the first year I truly developed my strategy) I’ve had at least 1-2 highly concentrated investments. Typically not more than that as the obvious “no brainer” situations just don’t come along all that frequently.
My biggest successes over those formative years were straight out of the value investors handbook:
Lakes Entertainment (LACO) — A cash shell that merged with a heavily levered business to shift from an asset value to earnings value
Symmetry Surgical (SSRG) — A micro-cap healthcare spin-off that generated tons of cash (~100% EBITDA to FCF conversion) which was eventually acquired
Nevada Gold (UWN) — A micro-cap casino stock generating tons of free cash flow
Stephan Co (SPCO) — Another micro-cap. A turnaround story which moved to an earnings / dividend story. This was a cool one for me owning something at a 15% dividend yield on a sustainable basis.
Cambium Learning (ABCD) — Small cap growth at a value price. Not sure why this never got recognition for the revenue/earnings growth despite a low (10x-ish) multiple
At times, these were each individually at >10-20% of my entire portfolio.
All the while, I was taking notes on what was working and what wasn’t. I found that smaller stocks without much attention were most appealing to me. I also started looking at just about every special situation regardless of size — spins, post-bankruptcy, management changes, major divestitures/acquisitions, etc.
This ultimately became the basis for my present day strategy:
Small cap long-term holds
Special situations which I may or may not hold forever
Tiny option bets on levered businesses or net-nets
I’ve only been at the private business “thing” since 2016 when I invested in a small manufacturing services business with a coworker from the value shop I worked at… This business is still around today and generating good returns with a small but well-rewarded management team.
In 2017, we acquired a warehousing business providing storage, pick, pack, ship, and light assembly services for retailers . We thought had some overlap with our manufacturing business. Turned out we were wrong on this one as we massively underestimated “working capital intensity” — something I’ve carried with me as a heavy lesson. We paid our employees, vendors, and freight providers daily/weekly while our customers had 30, 60, and sometimes 90 day terms. We wound up liquidating the business in late 2018.
In 2018, we shifted into trucking with what we thought was a really opportunistic deal. Lesson learned on the working capital front — we got paid on our contracts every week and didn’t have to carry any accounts receivable. We also paid our drivers, fuel, and trucks weekly so our cash flow matched up perfectly. The downside here was the lack of management help and stressful operations (it operated as a graveyard shift business from midnight to 8am or so, daily). We had trucks breaking down at 3am, drivers routinely not showing up for work, and other administrative headaches. After turning around the business with improved equipment, a better team, backup driver system, and a newly implemented General Manager, we sold the business to a small private equity group in early 2019.
2019 was a big year… We closed on 3 acquisitions that permanently reshaped our company…
Of the 3 deals — 2 were in the e-commerce industry and the 3rd was an accounting firm. My background as a CPA and working knowledge of QuickBooks from previous small business ventures made it a natural fit for us and e-commerce was attractive for the flexible work arrangement, steady stream of cash flow, and upside.
We’re very fortunate in how COVID has treated us with growth across all of our businesses (particularly in e-commerce). With the additional cash we’ve generated so far in 2020, we’re now looking at a few add-on deals to grow the e-commerce portfolio and accounting business.
So where does that leave us today?
When I started down the path of being a private business owner, I never had the intention of being “start-up” or “VC” in the sense that I wanted to massively scale a huge business and then cash out…
I wanted (and want) to build a fun place to work with people I like and a flexible lifestyle allowing for travel and family time.
My intention was to barbell my net worth in private businesses and public securities. Given the leverage I’ve used in private businesses I’m likely much higher in that area today.
I love looking at new businesses both public and private and will never tire reading / writing about them… That was and is the intention with my newsletter — it keeps me tuned into the markets and constantly turning over stones. My business ventures have helped me in public market investments and vice versa.
If there’s enough feedback for it, I’d enjoy writing about some of the goings-on in our private business ventures as well…